7 Contrary Calls

Covering stocks, bonds, currencies, interest rates, energy, and the economy, Elliott Gue, editor of Capitalist Times, offers seven forecasts for this year, each of which goes against the current market consensus.

Steven Halpern: Today, we’re joined by one of my favorite MoneyShow guests, Elliott Gue, editor of Capitalist Times. How are you doing today, Elliott?

Elliott Gue: I’m doing great. Thanks for having me on the show.

Steven Halpern: Now you recently published a fascinating article making seven predictions for this year and, interestingly, all seven of these go against the market consensus. Your first prediction is that the economy in the US will enter a recession within the next 18 months. Could you explain that view?

Elliott Gue: Sure, absolutely. Well, there really are two sides of the US economy. You’ve got the consumer side of the economy, which is bigger, but you also have the manufacturing and industrial side of the economy.

And that manufacturing and industrial side of the economy has been deteriorating for well over a year now since the summer of 2014 and we’ve seen the Manufacturing Purchasing Managers Index plummet below 50 for several months in a row. That’s typically the sign of an impending recession.

The consumer’s been holding up well. Consumer spending has been a bright spot, but I think that’s mainly due to falling oil prices and I think the effect of those falling oil prices on the consumer is beginning to pay and give much less of a tailwind this year.

Historically, the consumer has ultimately followed the manufacturing sector of the US economy, adding to that some of the stresses we’re seeing in the financial part of the economy, European banks, US banks, high-yield bond markets, and I think this adds up to a greater than 50% chance of a recession by the first half of 2017.

Steven Halpern: Now in line with that forecast, you also suggest that Treasury Bonds will outperform the S&P 500. Could you explain?

Elliott Gue: Sure, well in down market environments, and bear markets, and in periods of a recession, investors typically gravitate to the safest assets in the world and one of those is the safety of US Treasuries.

Go back to 2008, look at some of the US bonds—ETFs like the iShares Barclays 20+ Year Treasury (TLT)—and you’ll see that they were up more than 30% in 2008.

I think as odds of a recession began to increase this year, as the market begins to come down further, I think you’re going to see people gravitate right back to Treasury bonds. We’re already seeing a little bit this year. I think they’re going to outperform the stock market in 2016.

Steven Halpern: Now you also predict that the Fed will be forced to move to a zero interest rate policy. Why would this happen?

Elliott Gue: Sure, while the Fed hiked rates for the first time in almost ten years back in December of 2015, what we’ve seen since then is that the economy is continuing to show signs of weakness.

They’ve been saying they expected inflation to rise, the economy’s economic growth to pick up, but we haven’t seen much in the way of signs of that yet.

I think by the middle of this year it’s going to become obvious that the Fed…not only are they not going to be able to hike again in 2016, as they had originally planned, but I think they’re actually going to have to look back towards stimulus of the economy.

This, probably in the form of first cutting interest rates back to zero by the end of 2016, and potentially in 2017, even trying a negative interest rate like some of their partners in Japan and in the European Union or maybe even considering another round of quantitative easing.

Steven Halpern: Now, you also expect the euro to fall below parity. Could you expand on that?

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Elliott Gue: Yes, absolutely. Well, the euro’s been very weak against the dollar generally over the last two years or so and one of the main drivers there is that I don’t expect the Fed to be able to hike rates again in 2016.

US monetary policy is tighter than monetary policy in any other major trading partners, and by that, I say, Japan and the European Union in particular, but I think that generally speaking, people are going to gravitate towards holding dollars rather than holding euros or yen.

Now the other thing, of course, is that I’m expecting Treasury Bonds to do really well this year as a sort of safe haven asset. What that means is that foreigners are going to be cashing in euros, cashing in yen, cashing in various emerging market currencies to buy dollars, to buy Treasury Bonds.

And so I think that’s generally going to be a positive for the dollar and I think we have at least one more leg lower in the dollar below parity with the euro.

Steven Halpern: Now, you’re a longstanding expert in the oil sector and you’ve been right on target with your forecasts. In fact, we’ve spoken a number of times over the past year, and even back when oil was up to $100 a barrel, you were forecasting a decline down into the $20s.

This seemed outrageous at the time for many people. Now here we are and you’re taking a more positive look from a longer-term perspective. Could you expand on that?

Elliott Gue: Absolutely. We’re certain to see some of the things I’ve been looking for more than 18 months now and that’s that while I still can see another stab lower in oil prices in the first half of 2016.

US production is going to begin to decline. We’re going to see crude production outside North America also begin to decline because of all the spending cutbacks we’ve seen in energy, exploration, and production over the last 18 months. And that finally is going to bring supply back in line with demand.

Meanwhile, energy stocks are really cheap on most spaces. They’re about as cheap as they’ve been since the late 1980s, so I think that in the second half of this year, you’re going to see supply coming down for oil.

Demand is still growing at a fairly decent pace. You’re going to see the oil market begin to stabilize and that’s going to be really good for energy stocks.

Steven Halpern: Now, your sixth prediction suggests that utilities and energy stocks will outperform this year and right to that is your seventh prediction, which is that financial and consumer discretionary stocks will underperform. Could you share your thoughts on these?

Elliott Gue: Absolutely. One of the big trades last year—one of the most popular trades last year—was the so-called rising interest rate trade. The idea that when the Fed raises interest rates it bashes utilities and other high-income stocks.

It’s good for banks because it increases their net interest margins. I think a lot of people got into that trade and now it looks like the Fed is unlikely to be able to hike rates again in 2016, and, as I mentioned earlier, I think it’s actually going to be cutting rates back to zero or even trying zero interest rates by early 2017.

That’s really bad news for banks. It decreases their net interest margins and it makes the yield offered by utilities and other high-income stocks look particularly attractive.

I think you’re going to see that trade reversed—that rising interest rate trade reversed—and that means that’s really good news for utilities and really bad news for banks.

In energy, my play there is that that sector’s way too oversold, and as oil begins to stabilize, I think energy stocks have a lot of upside and strength.

Steven Halpern: Again, our guest is Elliott Gue, editor of Capitalist Times. Thank you so much for your time today.